Shining a Spotlight on Investment and Advice Costs: The Consumer Duty’s Impact

In the dynamic world of investments, where every decision carries financial consequences, understanding the true cost of investing has never been more critical. In the United Kingdom, a significant development in this regard recently came into play with the introduction of the Consumer Duty by the Financial Conduct Authority (FCA). This regulatory initiative has put costs and value for money firmly in the spotlight, creating a ripple effect across the financial services industry. In this blog, I aim to explore investment costs and dissect the Consumer Duty.

The Hidden Truth of Investment Costs

Before delving into the impact of the Consumer Duty, it’s essential to grasp the significance of investment costs. For many investors, the initial focus is often on potential returns and risk tolerance, while costs lurk in the background, quietly eroding their gains. These costs can take various forms, including management fees, transaction charges, and even taxes. One of the most insidious forms of cost is the management fee, which is levied by fund managers for overseeing your investments and potentially a platform provider. These fees might seem modest at first glance, but over time, they can siphon a substantial portion of your returns. Transaction charges, incurred when buying or selling investments, further eat into your profits. It would also be ignorant to ignore the costs associated with advice. All these costs compound and can significantly impact your overall investment performance.

Enter the Consumer Duty

Under the Financial Services Act 2021, the FCA introduced a groundbreaking initiative known as the Consumer Duty. It is being implemented in two stages. The first stage was implemented on 31st July 2023 to cover new and existing products or services that are open to sale or renewal, with the next stage coming into force on 31st July 2024 for closed products or services.

The primary aim is to place clients’ interests at the heart of financial firms’ operations. This means that financial institutions, including investment firms, are now legally obligated to act in the best interests of their clients. While this might seem like common sense, the Consumer Duty represents a significant shift in the industry’s mindset.

One of the key aspects of the Consumer Duty is the requirement for financial firms to provide clear, concise, and easily understandable information about costs and charges. This transparency empowers clients with the knowledge they need to make informed decisions about their investments. In essence, it aims to eliminate hidden fees and ensure that investors are fully aware of the impact of costs on their returns.

Armed with this knowledge, investors should be better equipped to make choices that align with their financial goals. First and foremost, it empowers investors to compare different investment options more effectively. With clear and standardised information about costs and charges, individuals can assess which investment products offer better value for money. This newfound transparency levels the playing field and fosters healthy competition among financial institutions to provide cost-efficient solutions. Moreover, the Consumer Duty encourages investors to take a more active role in their financial journey. Informed clients are more likely to ask questions, seek advice, and demand fairer pricing structures. As a result, financial firms are compelled to adapt and provide products and services that genuinely lead to good client outcomes.

Conclusion

The introduction of the Consumer Duty by the FCA represents a significant step toward a more transparent and client-centric financial industry. By shedding light on investment costs and requiring financial firms to act in the best interests of their clients, this initiative empowers investors to make more informed decisions, ensures that the true cost of investing is no longer hidden in the shadows and should help to lead to better client outcomes.

Transparency with fees has been the cornerstone of MHA Moore and Smalley’s approach to financial planning since the department was established in 1996. We believe that clients have a right to fully understand the costs associated with the services they receive, and we are committed to providing clear and comprehensive information about our fee structure. Fostering relationships with clients built on trust and transparency has helped to empower them make informed financial decisions with confidence over several decades, knowing that there are no hidden costs or surprises along the way.

It is worth noting that this article is focused primarily on investment advice which is one aspect of Financial Planning. A holistic financial planner can also assist with, retirement planning, estate and tax planning, insurance and risk management, employee benefits, cash flow management and long-term care planning.

This article should not be construed as a personalised recommendation and no action should be taken without seeking further formal advice.

MHA Moore and Smalley are authorised and regulated by the Financial Conduct Authority.